New York, NY, January 16, 2024 –SIFMA today submitted a joint letter with the International Swaps and Derivatives Association Inc. (ISDA) responding to the U.S. Basel III ‘endgame’ notice of proposed rulemaking (NPR) and the Federal Reserve’s GSIB surcharge NPR. The response warns that the proposed increases in capital for banking organizations capital markets activities are far greater than stated in the NPR and are not commensurate with the underlying risks.

Based on an industry quantitative impact study (QIS) with input from eight U.S. global systemically important banks (G-SIBs), the proposed Fundamental Review of the Trading Book (FRTB) and the revised credit valuation adjustment (CVA) framework would result in a 129% increase in market risk and CVA risk-weighted assets (RWAs) under the new expanded risk-based approach (ERBA) versus the current U.S. standardized approach. Given that the U.S. capital markets provide 75% of the financing for non-financial corporates and intermediate the hedging activities of these corporates, such dramatic capital increases would undermine market liquidity and vibrancy, resulting in increased costs and less choice for businesses, consumers and government entities that rely on U.S. capital markets for the vast majority of their funding, this would adversely affect US businesses and households and negatively impact U.S. economic growth.

To ensure the proposed rules are appropriately risk sensitive and avoid adversely impacting the U.S. capital markets, the associations recommend a number of data-driven calibration changes. These include allowing for greater recognition of risk diversification, creating stronger incentives for firms to adopt the FRTB internal models approach, and more appropriately tailoring capital requirements to the actual risks posed by certain products to avoid adverse impacts on key markets and end-users.  Additionally, the banking agencies should holistically consider how the proposal would interact with other prudential requirements, particularly the stress testing framework and the G-SIB surcharge, before finalizing the rule.

SIFMA believes that, given important analytical gaps in the proposal and the need for material calibration changes, the agencies must re-propose the entire rule for public comment with a new 120-day comment period. Any re-proposal should explicitly define the specific capital problems that need to be addressed and how a proposed solution would address them and should be backed up by a robust economic analysis demonstrating the benefits and costs of the proposed changes.

Once finalized, the associations recommend the rule should become effective no earlier than 18 months from the publication of the final rule to ensure banking organizations have sufficient time to implement the requirements.

The associations response to the GSIB surcharge NPR raises concerns that the proposed changes would lead to unwarranted and large capital requirements for banks offering client clearing services, potentially discouraging them from participating in this business and contravening a long-standing policy objective to promote central clearing.

To mitigate the negative impacts, the associations recommend that client-facing derivatives transactions under the agency model be excluded from the complexity and interconnectedness categories of the G-SIB score calculation. Failure to make this change would raise capital requirements across six of the G-SIBs that contributed to the industry QIS by $5.2 billion. The associations also recommend that derivatives exposures be excluded from cross-jurisdictional activity indicators and that the standardized approach for counterparty credit risk alpha factor should not be included in the interconnectedness indicator calculations.

The Basel III NPR response is available here.

The G-SIB surcharge consultation response is available here.

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SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development.  SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).